Why strategic finance?

Strategic finance deals in capital allocation. In a for-profit business the ultimate goal is to increase shareholder value. The C-level needs to have an understanding how business decisions (will) impact shareholders.

As a CFO, you need to understand the business model (= value creation) and translate it into financial scenarios. The ultimate outcome is a decision where, when, how much resources (time, money, people) will be invested. This can include allocation of resources to business initiatives (in sales, tech, operations, etc.), restructurings, or M&A transactions.

Understanding the business model

Before you start crafting financial scenarios, you need to understand the basics. Answer this question in terms of money:

“How does your company create value?” i.e. what needs to happen to create a sustainable profit in next 12 months

Is it by capitalizing on unique intellectual property (patents, production workflows), or a technology stack, or cost advantages throughout the product assembly, or distribution networks, or what is it?

1. Identify revenue drivers

Look at your P&L (statement of operations) and break it down into details. Identify revenue drivers:

What products, services, clients, geo. segments are driving the growth?

2. Understand the unit economy

The unit economy tells you if your business makes sense and how much you need to sell to make it break-even or even make return on investment. You need to understand how and why you make gross profit.

What inputs (people, material, services, processes) are necessary to produce $1 of revenue?

3. Identify expense drivers

Break down your P&L cost items into details and understand what drives your costs each month. You need to answer 2 questions (in a detail):

What costs are required to run the business? What happens to your expenses if your revenues double?

Business scenarios

Building a business scenario is fairly simple. You always start with business objectives, e.g. target market share, annual growth rates, or profitability goals.

In most cases, you forecast your revenues and fill in all expense items based on the drivers identified above. Always make a sanity check by measuring different KPIs; revenue / employee, gross profit margins, production utilization rates, required sales capacity or marketing conversion rates.

Finish by calculating ROI (IRR, NPV). Take all extra resources (expenses above base line and new external capital) and compare it to the expected revenues (cash flows) or future (incremental) enterprise value.